In response to numerous reader requests — yes, three can be considered numerous — we’ve decided to rerun our favorite items from Good Week/Bad Week from the past three months.
We hope you enjoy them as much as we enjoyed not having to write a new column this week.
(Disclaimer: While the entries in GW/BW are based on actual news items, some of the people, persons, and events in this article are fictional. I made up some quotes, too, just to keep things moving.)
Small Company CFOs
As any finance chief at a small to mid-side company will attest, credit is in short supply these days.
But that may be about to change. According to a quarterly survey of lenders conducted by Phoenix Management in late June, more than half of the respondents said they expected lending to middle-market and small businesses to rise through the rest of this year. In addition, 45 percent said that lending to large, corporate customers would increase as well.
Not all small companies will be larded by lenders, however. Nearly 60 percent of the respondents in the survey said technology was an industry to which they did not want to lend money. Only start-ups/new ventures were deemed more unattractive as credit risks than tech companies.
When asked which tech sectors were unattractive risks, lenders named E-commerce specialists, mobile and wireless operators, software developers, and companies in the B2D space (business-to-deadbeats).
In mid-July, management at Coke announced they would begin to treat employee options as an expense. “We think the time is right for corporate America to show leadership and integrity in their financials,” Coca-Cola chief financial officer Gary Fayard told Reuters. He called the current method of not expensing options a “loophole.”
Off the record, GW/BW asked several finance chiefs if they considered their companies’ accounting treatment of options “a loophole.” Three said yes, two said no, and one apparently misunderstood the question, noting that, yes, he generally has Fruit Loops for breakfast.
The Osmond Brothers
In remarks made at the end of June, President Bush conceded that the rash of accounting scandals is having a big impact on the markets. “I do think that there is an overhang over the market of distrust,” the President reportedly told reporters.
The President went on to say that “95 percent, or some percentage, huge percentage, of the business community are honest and reveal all of their assets, (have) got compensation programs that are balanced.” But, the chief executive conceded, “there are some bad apples.”
There certainly are (insurance salesmen, Attila the Hun). Interestingly, linguists and etymologysts concede that they’re not entirely sure when the bad-apple phrase first came into use, although they’re guesssing it was somewhere around harvest time. They do point out that the last notable use of the phrase came in 1971, when the Osmond Brothers had a No. 1 hit with “One Bad Apple (Don’t Spoil the Whole Bunch, Girl.”)
President Bush’s comments touched off a bit of controversy among the Washington press corps, many of whom seemed confused by the President’s ratcheting up of the number of apples in the Bad-Apple scenario. When reached for comment, however, Donny Osmond said he believed the President was right about the number of bad apples spoiling it for everyone.
House of Representative
In mid-July, the House passed stringent legislation that would create stiff criminal penalties for executives who commit business fraud. Shareholder groups cheered the tough House legislation but lambasted the much softer Senate law, which they claim was watered down by big-money lobbyists. Ultimately, the combined Sarbanes-Oxley bill was passed.
Still, interesting to note the big differences between the two original pieces of legisation, however. The House bill, for example, raises to 20 years the time behind bars for wire and mail fraud. That’s twice as long as the 10-year penalty in the Senate bill. In addition, the House bill would have created a new crime of “securities fraud” with a maximum penalty of 25 years in jail — considerably longer than the 10-year maximum prison term approved by the Senate. The House bill would also meeted out stiff criminal penalties for executives who retaliate against whistle-blowers. The less-stringent Senate version, by comparison, only provided tax breaks for whistle-makers.
President Bush In a ceremony in the White House in August, President Bush signed sweeping legislation aimed at deterring corporate fraud. While signing the bill, the President harkened back to the days of the Great Depression, calling the provisions of the legislation “the most far-reaching reforms of American business practices since the time of Franklin Eleanor Roosevelt.”
Added Bush: “No more easy money for corporate criminals, just hard time. Real hard time. The kind of time where you look at a calendar each day and wonder what day it is.”
The President went on to promise that the arrests of five Adelphia executives was merely the opening salvo in the administration’s plan to crack down on accounting abuses. Warning that the government will use all the tools at its disposal, the President noted that the recently created corporate fraud task is just getting started.
“Free markets are not a jungle in which only the unscrupulous survive,” the President explained. “They’re a jungle in which the scrupulous animals should also survive — survive, and build big straw things, or whatever it is they live in. But let there be no mistake: those who break the laws of the jungle — the jackals and hyenas and cheaters — they must pay a price. Hopefully, a good one.”
Scott Sullivan, WorldCom
The WorldCom CFO was fired in late June after the company announced it had uncovered accounting practices that were not exactly consistent with GAAP, or IAS, or even new math. Those “inconsistencies” will force the company to restate recent revenues by nearly $4 billion. Sullivan was later indicted on fraud charges.
Company management says it plans to make up the $4 billion revenue shortfall with a new consumer pricing plan. WorldCom will now charge its long-distance customers 7 cents a minute for the first 10 minutes, $432,000 for every minute after that.
L. Dennis Kozlowski, ex-CEO, Tyco Int’l.
In June the CEO of embattled conglomerate Tyco Intl. resigned from the company amid rumors that he was under criminal investigation. The next day, Kozlowski was indeed indicted by New York state for allegedly conspiring to avoid paying sales tax on paintings by such masters as Claude Monet and August Renoir. Kozlowski has since pleaded innocent to the charges.
Manhattan District Attorney Robert Morgenthau charges that Kozlowski conspired with art dealers and Tyco employees to dodge an 8.25 percent sales tax. Allegedly, Kozlowski managed this neat trick by making it look as though paintings he purchased in New York were shipped to Tyco offices in New Hampshire. But according to the indictment, the Tyco CEO didn’t ship the paintings anywhere. In fact, Morgenthau claims Kozwloski once instructed a truck driver to deliver five empty boxes to New Hampshire.
According to Morgenthau, the scheme saved Kozlowski $1 million. Reportedly, the Tyco CEO earned $450 million in stock and compensation over the past four years.
Prosecutors say they were tipped off to the alleged shipping scam by a UPS clerk, who claimed Kozlowski once asked for extra bubble wrap, but then didn’t do anything with it.
In early June, Microsoft Corp. agreed to cease, desist and just plain stop from committing accounting violations and other violations of federal securities laws.
Apparently, the Securities and Exchange Commission found that Microsoft had maintained seven reserve accounts in a manner that did not comply with Generally Accepted Accounting Principles (GAAP). “More particularly, the Commission found that these reserves did not comply with GAAP because, to a material extent, they did not have adequately substantiated bases.” The SEC said Microsoft’s inadequately substantiated bases led the company to misstate its income in filings made between July 1, 1994, and June 30, 1998. That’s a lot of misstatements.
Moreover, the Securities and Exchange Commission found that Microsoft did not properly document the bases for these accounts. In addition, the Commission said Microsoft failed to maintain proper internal controls, filed statements that did not comply with GAAP, and overstated income. The regulatory agency also said Microsoft managers lied about their SAT scores and were mean to cats.
It’s bad enough that senior executives at Peregrine Systems has apparently gotten on the wrong side of regulators at the Securities and Exchange Commission. Now, it appears they’ve annoyed their former bookkeeper.
According to press reports this week, auditor KPMG recently sent a letter to the SEC indicating that Peregrine’s problems could be a lot more serious than the company has so far let on. Reportedly, KPMG claimed that Peregrine engaged in accounting practices that “indicated possible fraud.”
Specifically, KPMG is believed to have accused Peregrine of making “side agreements” with customers, allowing them to not pay for software they were agreeing to purchase. According to reports, KPMG also informed the SEC that Peregrine understated the purchase price of an acquisition, wrongly booked deals with extended payment terms, and “inexplicably fired the best damned auditing firm in America.”
Duke Energy, El Paso Corp.
Management at Duke Energy and El Paso Corp. reported last Friday that they received subpoenas for documents from the U.S. Attorney’s Office in Houston as part of a grand jury investigation into round-trip trades. But spokesmen for Duke and El Paso told GW/BW that both companies sent subpoenas to the U.S. Attorney’s Office, so that should cancel out the original subpoenas.
The Group of Seven (not THAT Group of Seven)
As CFO.com reported in July, Standard & Poor’s announced it is adding seven new companies to its bellwether 500-stock index. Rather than change the name to the S&P 507, the ratings specialist decided to remove seven companies from the benchmark. Interestingly, all seven of the exiters were non-U.S. corporations.
Those getting the boot included Royal Dutch Petroleum, Unilever, and Nortel Networks. In addition, officials at the S&P announced they will no longer serve Swiss cheese at their swanky cocktail parties, and have prohibited the sale of danish in the company commissary.
On the same day that ex-WorldCom finance managers were hauled into court, Warnaco Group Inc., said the SEC may soon bring charges against the bankrupt clothing maker.
The company’s management added that SEC lawyers informed them on July 18 that they intend to recommend that the SEC authorize an enforcement action against Warnaco and certain individuals, alleging violations of the federal securities laws
In what can only be described as a curious legal strategy, Warnaco management stated it has not been cooperating with the SEC investigation. Instead, management at the apparel company said it has been hiding stuff and shredding every bit of paper on the premises.